Problem 4-17

The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year.

Haverly Company Income Statement This Year ($000)
	$		%
Revenue	$83640		100.0
COGS	35990		43
Gross Margin	$47650		57
Expenses:
Marketing	$18169		21.7
Engineering	3653		4.4
Fin & Admin	3735		4.5
Total Exp.	$25557		30.6
EBIT	$22093		26.4
Interest	3277		3.9
EBT	$18816		22.5
Inc Tax	7903		9.4
Net Income	$10913		13

Haverly Company Balance Sheet This Year ($000)
ASSETS			LIABILITIES & EQUITY
Cash	$ 6421		Accounts payable	$ 2249
Accounts receivable	13940		Accruals	444
Inventory	7198
Current assets	$27559		Current liabilities	$ 2693
			Long-term debt	$23937
Fixed Assets			Equity
Gross	$55564		Stock accounts	$14413
Accumulated depreciation	(29519)		Retained earnings	12561
Net	$26045		Total Equity	$26974
Total assets	$53604		Total L&E	$53604

The following facts are available.

• Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 45% purchased material.
• Currently owned assets will depreciate an additional $1103000 next year.
• There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $31 million is expected to grow by 13% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 8% of the payables balance at year end.
• The combined state and federal income tax rate is 42%.
• Interest on current and future borrowing will be at a rate of 10%.

PLANNING ASSUMPTIONS

Income Statement Items

1. Revenue will grow by 12% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing.
2. The pressure on prices will result in a 1.5% deterioration (increase) in the next year's cost ratio.
3. Spending in the marketing department is considered excessive and will be held to 20% of revenue next year.
4. Because of a major development project, expenses in the engineering department will increase by 20%.
5. Finance and administration expenses will increase by 7%.

Assets and Liabilities

6. An enhanced cash management system will reduce cash balances by 10%.
7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)
8. The inventory turnover ratio (COGS/inventory) will decrease by 0.5x.
9. Capital spending is expected to be $5 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year.
10. Bills are currently paid in 50 days. Plans are to shorten that to 30 days.
11. A dividend totaling $1.5 million will be paid next year. No new stock will be sold.

Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts in Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement.

HAVERLY COMPANY INCOME STATEMENTS ($000)
	THIS YEAR		NEXT YEAR
	$	%	$	%
Revenue	$83640	100.0	$	100.0
COGS	35990	43		%
Gross Margin	$47650	57	$	%
Expenses:
Marketing	$18169	21.7	$	%
Engineering	3653	4.4		%
Fin & Admin	3735	4.5		%
Total Exp.	$25557	30.6	$	%
EBIT	$22093	26.4	$	%
Interest	3277	3.9		%
EBT	$18816	22.5	$	%
Inc Tax	7903	9.4		%
Net Income	$10913	13	$	%

HAVERLY COMPANY BALANCE SHEETS ($000)
ASSETS				LIABILITIES & EQUITY
	THIS YR	NEXT YR			THIS YR	NEXT YR
Cash	$ 6421	$		Accts. Pay.	$ 2249	$
Accts. Rec.	13940			Accruals	444
Inventory	7198
Curr. Assets	$27559	$		Curr. Liab.	$ 2693	$
				Long Term Debt	$23937	$
Fixed Assets				Equity
Gross	$55564	$		Stock Accts	$14413	$
Accum. Depr.	(29519)			Retained Earn	12561
Net	$26045	$		Total Equity	$26974	$
Total Assets	$53604	$		Total L & E	$53604	$

HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000)
	A/R	$
	Inventory	$
	A/P	$
	Accruals	$
		$
HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000)
OPERATING ACTIVITIES
	Net Income	$
	Depreciation
	Increase in W/C
Cash Flow From Operating Activities		$
INVESTING ACTIVITIES
Increase in Gross Fixed Assets		$
FINANCING ACTIVITIES
	Decrease in Debt	$
	Dividend	$
		$
NET CASH FLOW		$
RECONCILIATION
	Beginning Cash	$
	Net Cash Flow	$
	Ending Cash	$